2.4 National Income Flashcards
What does the most basic form of the circular flow of income consist of ?
Two sectors ; households and sellers / producers.
What is the circular flow of income ?
A simplified representation of the floe of Money, goods and services between households and firms in an economy.
What do households supply firms / businesses with and what do they get in return ?
They produce labour and in return get wages / salaries.
What are the three ways of measuring economic performance ?
National Output
National expenditure
National Income
What is national income ?
Income paid by firms to households on goods and services in return for land, labour, capital and enterprise.
What is national expenditure ?
The value of spending by households on goods and services.
What is national output ?
The value of goods and services from firms to households.
Why do all the three ways of measuring the level of economic activity come to the same answer ?
National output = National income = National expenditure
Why is the two sector model of the circular flow of the economy too simplified ?
- The government needs to be added as they take money away through taxation and add money by spending.
- The model needs financial services who can inject money into the system through investment and take money from consumers ( thier savings ).
- foreign markets need to be added due to exporting and importing.
What is the difference between income and wealth ?
Wealth is a stock of assets whilst income is a flow.
What is wealth ?
Things that people own : houses, possessions etc
What is income ?
The money people receive : money from work, interest from savings etc.
What are the three injections in the economy ?
Government spending
Investment
Exports
What are three withdrawals / leakages in the economy ?
Taxes
Savings
Imports
What occurs when injections are greater than withdrawals ?
The economy is growing
What occurs when withdrawals are greater than injections ?
The economy is shrinking.
What happens when the economy is in equilibrium ( in terms of withdrawals and injections ) ?
Injections = withdrawals
So national income stays the same.
Where is equilibrium position for national income on a diagram ?
Where AD and AS meet.
In the short term, what do both classical and Keynesian economists agree on ?
That AD will be downward sloping and AS will be upwards sloping.
What shape is the classical LRAS curve ?
Perfectly inelastic
What is meant by the classical LRAS curve being perfectly inelastic ?
A change in price has no effect on change in output. ( a shift in Ad would not affect long run national output and will only affect price levels ).
What do classical economists believe in the long term about employment ?
The economy will always return to full employment level and therefore there will be no unemployment in the long run.
How do classical economist believe an economy can increase output ?
Increasing ( shifting ) LRAS - AD changes without this only cause inflationary pressures.
Why do Keynesian economists believe that there can be equilibrium at less than full employment ?
They don’t believe that a rise in unemployment rapidly leads to a fall in real wages.
